During the recent slower period in the Housing Market, the best place to have been from a “value preservation” point of view appears to have been in the country’s major cities, and perhaps within those cities at the lower-to-middle income end. Major Metros are largely driven by the more essential primary residential demand, a source of demand less cyclical than holiday home demand for instance. In addition, their well-diversified economies are a bit less cyclical than, for example, those of smaller mining towns.
Major Metro Area Value Bands – Lower End Outperforms
The FNB Major Metro Area Value Band House Price Indices provide a picture of the relative performances across areas, grouped by average price levels of those areas, in the 6 major metros of South Africa (Tshwane, Joburg, Ekurhuleni, Ethekwini, Nelson Mandela Bay and Cape Town).
The indices use Deeds data, so they are not entirely comparable with the monthly FNB National House Price Index which makes use of the more current FNB-specific database.
Of late, the relative performances continue to point to the high end of the market being generally a bit weaker than the more affordable metro areas, as one would perhaps expect in these recently constrained, but not stressed, economic and financial times.
Using Deeds data transactions by individuals (“natural persons”), FNB compiles their 4 “core” FNB House Price Indices by Major Metro Area Value Band, namely Upper Income Areas (Average house price = R2.892m), Middle Income Areas (Average Price=R1.517m), Lower Middle Income Areas (Average Price = R952,964) and Low Income Areas (Average Price = R503,305).
On a year-on-year basis, FNB sees that the Low Income Area House Price Index showing the strongest growth, and actually had accelerated mildly through 2016, recording 6.7% year-on-year for the 4th quarter of 2016 compared with the previous quarter’s 6.5%.
The most “steady growth” area value band in recent years, however, has been the Lower Middle Income Area House Price Index, recording the 2nd highest average price increase of 6.4% in the 4th quarter, an increase from the previous quarter’s 5.7%. FNB finds this segment’s average price inflation in the post-2008/9 period to have been the most stable of the 4 area value bands.
With interest rates having risen, high net worth individuals’ investment incomes perhaps having grown slower in recent years, municipal rates and utilities tariffs rising sharply especially for higher end home owners, and effective personal tax rates being ratcheted up in a “no growth” economy, it is not surprising to see the Middle and Upper Income Area Segments’ average house price growth being the slowest at 3.2% and 2.7% respectively. Both of these segments’ price inflation rates have slowed from having had the 2 highest rates of the 4 segments back in 2014.
Holiday Towns Now Under Performing Metros
Overall, the Major Metros of South Africa continue to be perhaps the more “stable” performers through weak economic and housing market periods.
In the 4th quarter of 2016, the FNB Major Metro House Price Index grew by 4.6% year-on-year. While this is far from an impressive growth rate, it has experienced fairly similar growth in the prior few quarters, whereas the more cyclical FNB Holiday Towns House Price Index has tapered to a lower 1.8% year-on-year growth rate.
During a better period back in 2014/15, the Holiday Towns House Price Index growth rate exceeded that of the Metros. This is customary for this market to outperform metros in good times but under perform in weak economic times. In the tougher times, households cut back on luxuries, and for some this may mean postponing that holiday home purchase. This category of home demand can thus slow more significantly than that of primary residential demand, the latter form of demand dominating the Metros.
FNB would therefore expect that the Holiday Town House Price Index should under perform the Major Metro Index in the near term.
Mining Towns Understandably Weak
The weakest of FNB’s main regional aggregations, however, appears to have been the Mining Town markets in recent times.
The FNB Mining Towns House Price Index fell into slight year-on-year deflation in recent quarters, to the tune of -0.4% as at the final quarter of 2016.
This should not come as too much of a surprise, given that the country’s Mining Sector as a whole has experienced severe weakness in recent years, taken weaker by a sharp fall in mining commodity prices starting back around 2011.
South African Mining’s low long term growth performance, even prior to 2011, appears to be reflected in the long term performance of FNB’s Mining Town House Price Indices. Since the 1st quarter of 1999, when all of these house price indices commenced, the Major Metro House Price Index has inflated cumulatively by 560.67% up until the end of 2016.
By comparison, the overall Mining Towns House Price Index has inflated by a lesser 437.83%, while the Gold Mining Towns House Price Index has risen by a still lesser 392.22% over the same period.
It would seem that much of the Mining Sector’s long term stagnant growth is reflected in the relative long term performance of mining town housing markets.
This is NOT to say that mining town markets haven’t had some great periods over the past decade-and-a-half or so. But they appear to have underperformed the big cities, the latter buoyed by their long term urbanization trends and often superior long term economic growth
Former Townships Continue ‘Out Performance’ But Slowing
Finally, within the Major Metros, FNB has carved out the “Former Township” regions and compiled an index for these regions. These regions are ones formerly classified as “Black” areas under the Apartheid system, and the purpose has been to observe the price performance as these regions normalize over the long term from “dormitory” towns into ones with greater levels of economic activity within their boundaries.
Recently, the Former Township House Price Index continued to mildly outperform the overall Major Metro Regions in terms of growth, recording 6.1% year-on-year house price growth in the final quarter of 2016. However, the Townships also appear to be feeling the impact of higher interest rates and a sluggish economy, having slowed from a multi-year price growth rate of 12.6% back in the 2nd quarter of 2015. At an average house price of R364,567, the former Townships remain on average the most affordable metro regions.
In short, the “outperforming” major residential regions latein 2016 appear to have been the more affordable parts of the country’s major cities.